After a partial shut in during early 2020 amid reduced producer activity, Crestwood Equity Partners LP’s Arrow system in the Bakken Shale achieved record volumes in natural gas, crude and water in the final quarter of the year, with “a lot more activity” expected in 2021, according to management.
“The Bakken play remains extremely economic and as we look into 2021, in a $55-60/bbl crude price environment, we anticipate a lot more activity in 2021,” CEO Bob Phillips said last week on the fourth quarter earnings call.
The midstream company expects around 45 three-product wells, to be comprised of crude oil, natural gas and water, to be connected to the Arrow system in North Dakota this year if crude prices remain near $60. Twenty-five to 30 now are drilled but uncompleted wells. “All of that new production is expected to drive growth in natural gas and produced water volumes year/year,” according to Phillips.
During the fourth quarter, the Arrow system averaged natural gas gathering volumes of 142 MMcf/d, up 19% from 3Q2020, with crude gathering volumes of 130,000 b/d, up 21%, and produced water gathering volumes of 98,000 b/d, up 1%. Phillips said the rise in volumes moving across Arrow was because of stable commodity pricing during the quarter that enabled producers to accelerate well connections originally scheduled for 2021 into 4Q2020.
Producers on the Arrow system connected 21 three-product wells during the quarter, resulting in a total of 70 three-product well connections and 14 water-only well connections in 2020. At current strip pricing, Crestwood estimates there are around 500-600 three-product drilling locations and about 350-450 water-only drilling locations on the Arrow system.
Bakken capital investments for 2021 are to remain focused on the enhancement and expansion of the produced water gathering system, ongoing natural gas and oil optimization projects to support producer development plans, and incremental system compression.
Phillips said the increased level of mergers and acquisitions (M&A) that has taken place in the Bakken has put “many of our customers in a very strong financial position to continue to drill and develop their acreage on the Fort Berthold Indian Reservation.” The M&A activity, he said, highlights the “great economics that our producers enjoy up there in the Bakken,” with lower drilling and development costs. Drilling and completion costs have decreased on a per-foot basis, and “the well performance continues to improve each year.”
Phillips took the time to address the Biden administration’s temporary ban on federal leasing and permitting. He said the Arrow system would not be adversely affected since tribal lands are excluded in the executive action.
Similarly, the pause on permits is not expected to impact Crestwood’s assets in the Permian Basin, which are primarily on private lands. Producers in the Permian also have secured “numerous” permits on federal lands that should limit impacts for the “next few years, according to the CEO.
Meanwhile, Crestwood continues to develop contingency plans if the Dakota Access Pipeline (DAPL) is ordered to shut down. The company now has three pipeline outlets with a capacity of more than 120,000 b/d for producer customers on the Arrow system. Phillips noted that Crestwood also has trucking options, which he said have seen a “big increase in new contracting and demand over the last few months.”
Turning The Page
The CEO also is optimistic about the future of the Powder River Basin (PRB), where its largest producer customer, Chesapeake Energy Corp., has emerged from bankruptcy. Crestwood in the fourth quarter signed a new agreement with Chesapeake that puts the company in “a very strong position to develop and produce its acreage” in the PRB with reduced fees in the short term that “mitigate shut-in risk” and “leverage new capacity additions to support new development over the next few years.”
Phillips touted Chesapeake’s “new capital structure, lower operating cost” and “sufficient liquidity to operate their business.” The company is a “bigger, better, stronger company, and that’s going to work well for Crestwood in the future.”
About 60% of Chesapeake’s mineral acreage is on private or state lands, and the company has a “significant number” of approved federal permits in hand to continue to drill and develop over the next few years.
That said, having recently emerged from bankruptcy, Phillips said Chesapeake has “some other opportunities,” particularly in the dry gas natural gas plays. In addition to the PRB, Chesapeake’s substantial leasehold includes nearly 540,000 net acres in Appalachia and 420,000 in the Brazos Valley of East Texas. It also has 225,000 net acres in the Gulf Coast region and 220,000 in South Texas.
“From an economic standpoint, that’s probably where they should be focused right now,” Phillips said. “We’re just happy to have all this behind us.”
Meanwhile, Crestwood is starting to have discussions with other producers in the PRB for incremental activity, “which we think will drive additional volumes through the Jackalope system and the Bucking Horse processing plant,” according to the CEO.
In the Permian, Crestwood connected 47 wells to its gathering systems, “and we expect to connect 50% more than that in 2021,” according to Phillips. The chief noted that there is “a lot of excess capacity” in the basin, so as it pivots to a lower capital spend model, its focus will be on free cash flow (FCF) generation.
The midstreamer expects capital investment to be 72% lower year/year to between $35-45 million. FCF is forecast to be between $90 million and $160 million, which the company plans to use to improve the balance sheet and enhance liquidity. Maintenance capital costs are estimated to be between $20 and $25 million. Crestwood expects to generate distributable cash flow (DCF) in the range of $320-$380 million, with net income projected to range from $85 million to $145 million.
“While we still see volatility in the sector in 2021, we are increasingly optimistic about the year, and we see a lot of potential for increased activity,” Phillips said.
Noting the improved oil price environment, the CEO said “we’re beginning to hear more and more positive outlooks from producer customers, and we anticipate a pickup of activity in our crude basins driving incremental volumes.” Crestwood also has seen “elevated natural gas activity over the past six months,” which management expects to continue.
Crestwood reported fourth quarter net income of $27.8 million (3 cents/share), compared with net income of $47.2 million (30 cents) in 4Q2019. The company reported a full-year net loss of $15.3 million (minus $1.59/share), compared with net income of $319.9 million ($3.11) in 2019.
DCF in 4Q2020 was $106.3 million, up from $89.6 million in the prior year period. Full year DCF was $361.2 million, up from $304.9 million in 2019.
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